Don’t just do something! Stand there!

Most of the time, private investors are best off sticking to their plans and ignoring this sort of news panic.

The best reason: we’re last to hear about it.

I have a friend in the City who has been working on debt in the UAE for over a year. He has several dozen friends in the City who all have friends in the City.

This is even leaving aside the fact that tens of thousands of people are watching that debt all day long, full-time – I’m just talking about his one social network.

I’m not saying they will all get the right information, or that they will profit from it. Just that we heard about it last from sensationalist writers who are all sick to death about being wrong about the stock market rally and are praying for a crash.

If you’re a truly passive investor, ignore the market’s tantrums, keep up your monthly investments averaging-in, and get ready for Christmas.

If you’re a stock picker, it’ll almost certainly be too late to sell when you hear this sort of news.

It might make more sense to buy, in fact – I’ve written before on crisis investing, in response to the now clearly hysterical panic over swine flu.

In my humble opinion, such vague developments are very hard for us to profit from, as opposed to company blunders.

A company cock-up is hard to profit from too, of course – the market is generally pretty efficient – but you can at least try to work out the financial damage to the company and compare it to the impact of the blunder on the share price.

With crisis news stories, almost anything can happen.

You will hear about hedge funds and traders who do make money from such events, but everyone calls heads 50% of the time. You have to get it right more often than wrong to make money.

Anyone who shorted the market last Friday had paid a heavy price by today.

Equally, anyone who buys now may regret it if contagion does spread.

Too hard. Ignore it, I say.

In fact, I’ve just come up with a new motto: “When it doubt, shut it out.”

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Andrew Smithers (author of Valuing Wall Street) offered the best response to this line of thought in an interview that I read several years back. His message was (I may not have the quote precisely right) — He who panics first panics least.

The flaw in reasoning in the argument made in this blog entry is the claim that “Over 40 years of our investing for retirement, history suggests investors in stocks will do very well.” Not so. What the record of the past 140 years shows is that numbers on pieces of paper did well, and that actual human investors did not do so hot. The two are very, very different things.

We went to a P/E10 level of 33 in 1929. The fall in the price of stocks in the years that followed was 80 percent real. We went to 44 this time around. So the rational investor is expecting a total drop in value before this secular bear is over of something in the neighborhood of 90 percent or so. How many human investors are going to hold to their insanely high stock allocations through that? I think it is fair to say that the correct answer is a number closely approaching zero.

If you’re going to sell anyway, it’s better to sell now, before the next price crash. No?

I favor sticking to a plan for the long run. But to do that, you need to go with a plan that makes sense. That means taking valuations into account when setting your stock allocation. Buy-and-Hold has been pushed so mercilessly for the past 30 years that few of today’s investors have taken valuations into account. Most of today’s investors should get out of stocks and then go back and learn the ABCs of stock investing (not as taught by The Stock-Selling Industry, but as taught by the historical data going back to 1870) and then adopt a plan that makes sense and then commit to sticking to the plan.

If you really are going to stick with something, you have to make sure that the thing you are planning to stick to makes sense. That’s the step we missed this time around (because of our misplaced confidence in the marketing slogans of The Stock-Selling Industry), in my assessment.

@Financial Samurai – It is hilarious. They had a fund manager called Hugh Hendry who was uber bearish for a long time, who was wheeled out seemingly every week up until about May, peddling his doomsday and government bonds scenario. Weirdly, he hasn’t been seen so much since then. Hugh may be right or wrong, that’s not the point – as you say, it’s “who can we find who goes with the weather?” that generally rules their thinking.

That said, most pundits have tended to be of a bearish persuasion it seems. It has been a crazy old rally. That’s why I think they all jumped on Dubai as their saviour.